Diligently investing in a 529 plan? Hope to finance future tuition?

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For those without the benefit of a WSJ subscription, here's a text copy. It is not posted in this group due to copyright concerns.

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Your hopes that your money buys education for your beneficiaries, as you thought you were promised, may be a little bit more optimistic than they are realistic.

Apparently,

1) states are going through severe financial crunch and 2) The "investments funds" that were set up to hold the 529 plan capital experienced severe losses.

So, the education plans try hard to weasel out of the tuition obligations. Most of them are not backed by full faith and credit of the states.

A great invention of Alabama bureaucrats, is refusing to cover tuition costs that are "above state average", without, of course, paying any more where the costs are below average.

Alabama 529 plan is already embroiled in lawsuits, and many states will likely be forced to try to not honor their tuition obligations.

I never invested in 529 plans, partly due to investment inflexibility, partly because I thought that corrupt fools will manage my money, and partly because of solvency concerns. I always thought that 529 plans amount to exchanging money for a vague promise that states can always renege on.

Comments?

i
Reply to
Igor Chudov
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Sounds like you're complaining about the *subset* of 529 plans wherein you're prepaying for X years of tuition at any of the participating schools.

Doesn't seem like this applies at all to the far more common kind of 529 plans where you invest your money in a (admittedly limited) universe of mutual funds.

-- Rich Carreiro snipped-for-privacy@rlcarr.com

Reply to
Rich Carreiro

Rich, your comment is completely spot on. I only talk about the prepaid plans. However, I would not invest in regular plans either, for a variety of reasons.

Igor

Reply to
Igor Chudov

The dangers of the prepaid tuition plans have been discussed many times. Those plans have been frozen in many states.

What are your reasons for avoiding the now-more-commonly-used

529 savings plans? They have pretty much nothing whatsoever to do with the article you posted (other than that you could roll over principal from the prepaid plans into the savings plans)

Just curious.

Reply to
BreadWithSpam

I have been involved in 529 conversations on other boards. I do not think the value of the 529 for a limited period of time (5-18 years) is worth it.

My suggestions if you have excess monies (free cash flow) to invest for your familie's well being, consider these options:

1) Do you have any other debt- car loans, credit card, consumer debt? 2) Is Roth fully funded? (if eligible) 3) Is 401k maxed? 4) Is mortgage paid off? 5) do you have a taxable investment account?

4) and 5) is where I emphasize you can do better than a 529 IF you think you can qualify for the federal tax credits for education. If you earn too much money to qualify for the educational tax credits, its probable the state tax deduction on a 529 is a good solution. If you think you will spend 10k+ per year on education, why not direct savings to a taxable account (assuming mortgage and other priorities above it are taken care of) and use the money for education (still) but claim a larger tax benefit than the 529 offers?

Much of this is dependent on the amount of money being saved . If a person is contributing $1000/year to college funds, their situation will look much different than someone with all of above maxed and contributing $1000/mo to college expenses.

I debated this for myself (I have twin boys about to turn 2) and my conclusion is I would rather the $1000/year I can free up pay down my mortgage, with intention of my $2200/mo mortgage being paid off before kids start college so that same money can be used to claim any federal tax breaks on education while also using the $1000/year now to improve my own financial balance sheet.

Reply to
jIM

Or to phrase it in a way that leads some people to use them:

If you are already holding Investment X in a taxable investment account, and you plan to pay for college costs using Investment X, and Investment X or something nearly identical is available in a 529 plan at reasonable cost, why would you not own Investment X in a 529 plan instead?

There are some valid reasons such as beliefs about financial aid, possibly estate planning...but it's potentially a way to turn "taxable" into "tax free."

-Tad

Reply to
Tad Borek

Good thinking. I would guess #4, paying off the mortgage, is too often ovelooked by people chasing after high and impossible returns with their excess cash. That is an excellent way to get a substantial return, not just later, but immediately, and having a fully paid-for house at the time of retirement does wonders for security and peace of mind.

Reply to
Don

I see this as a cash flow issue.

If I am spending $2200/mo on my mortgage now, and can free that money up for college, this means 3 things

1) My mortgage is paid off before retirement 2) I have cash to pay for college (I do not need to save 18 years for college when in one year I can pay $24,000 out of normal cash flow) 3) I am eligible (barring tax law changes LOL) for the federal educational tax credits to some degree because I use taxable monies for the costs.
Reply to
jIM

My argument is that tax free is not much of a savings over federal tax credits (if eligible).

If you invest $10,000 in a 529, what is your SAVINGS and what is your COST are the questions I ask.

SAVINGS: tax free gains and tax free withdraws- both can be estimated COST- the money in the 529 cannot be used to claim any of the $2000 federal tax credit (lifetime learning) or the hope credit.

If you have a decent idea about how much you will spend on college (for example will you spend $10,000 per year to get full $2000 credit), show me that the savings will be more than $2000.

Reply to
jIM

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